Boeing Accounting Method Could Smooth Out Dreamliner Problems

Boeing has a major public relations problem on its hands from troubles in its 787 Dreamliner program, but the impact of those difficulties may not be reflected in its financial statements for some time thanks to a special accounting method it employs.

The aircraft maker uses a so-called program accounting system to measure the success of products like the Dreamliner. The GAAP method allows Boeing to estimate and spread out the cost of making the planes over several years.

“Any cost associated with these recent troubles would be allocated to the 787 over the life of the program,” said Yair Reiner, an analyst with Oppenheimer & Co. “It may take them years to figure out the impact.”

The first planes off a production line are always more expensive than later planes, given the steep initial development costs. But, as CFO Journal’s Emily Chasan reported in November 2011, instead of taking a loss on the first planes, the company comes up with an estimate for the program’s profitability as a whole — as opposed to individual planes — after making educated assumptions about total production costs.

As of the third quarter, Boeing had calculated its program profitability, a number it doesn’t disclose, based on the production of 1,100 planes over roughly 10 years of production, according to SEC filings. But if those costs or revenue assumptions change, the program profitability number must be updated.

According to one person familiar with Boeing’s accounting, the company can keep its profitability estimate private if the program is expected to break even or make money. That means higher costs of the program don’t have to be broken out on the income statement unless they push the whole program into the red. But if that did happen, the company would have to disclose the program’s loss.

With the current Dreamliner troubles, production costs may go up if the company has to make major changes to the plane’s electrical systems, or if it has to replace the lithium-ion batteries it is using in the planes. According to Boeing’s third-quarter earnings filing with the SEC, the Dreamliner program’s profitability has already come under pressure. Production delays and other problems forced the company to record lower than expected margins on the planes it has so far delivered to customers, and it flagged the risk that the program could go into a loss position if more problems occurred.

But it’s far from a given that the recent problems with the planes will make the program unprofitable, said Richard Aboulafia, a commercial and military aircraft analyst with Teal Group. He said the long life of the 787 program gives Boeing time to correct any issues and keep it going.

“It’s damaging, but there’s still a good chance they’ll get this jet right,” he said.

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